Why the market is turning to quality

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favor quality companies.

Oct 7, 2021

2 minutes

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favor quality companies.

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favor quality companies.

The market has been put on notice that the Fed will begin removing some of the liquidity support which has driven markets.
  • As a result, we feel fundamentals will be the critical factor in determining which companies outperform. Many of our portfolio holdings have delivered impressive results this year, ahead of estimates, and have been correspondingly rewarded by the market.
  • With the possibility of rising inflation, quality companies with strong competitive positions and pricing power should be in a position of strength. We favor companies operating in structural growth areas, which are less reliant on overall economic dynamics.
  • There has been a change in market leadership. Quality is back in favor, and while cyclicals appear supported, value sectors have begun to lag as the strength of recovery has been called into question.

Global Franchise: outperformance since start of 2021 earnings season. There has been a change in leadership within equity markets

Why the market is turning to quality - Graph 1

Source: Ninety One, Morningstar, June 30, 2021.
The above charts show daily returns. The returns are net of a 0.75% management fee (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD.

Ninety One’s Quality team adopts a purist quality approach, which we have applied consistently over time.

Global Franchise has the highest exposure to quality companies relative to a sizeable competitor universe with no drift in exposure

Why the market is turning to quality - Graph 2

Source: Style Analytics, Ninety One, as at June 30, 2021. Quality tilt shown month on month as the average of managers tilt score to ROIC, ROA, Net Profit Margin, Gross Profit Margin, and Returns Stability. ̒Global Quality Manager’ representative of strategies in either the eVestment Global Large Cap Equity or eVestment Global All Cap Equity universe, who have quality in their strategy name or have stated quality as their equity style emphasis in their eVestment strategy profile, where holdings are available in style analytics or can be sourced from other sources for analysis. The portfolio may change significantly over a short space of time.

Our portfolio companies have attractive characteristics compared to the wider market.

Why the market is turning to quality - Graph 3

Source: FactSet, Ninety One, 31 July 2021. The portfolio may change significantly over a short period of time. The above reflects the portfolio characteristics reweighted excluding cash and cash equivalents. Inception date: 30 April 2007.
1. FCF Yield calculation excludes companies classified in the Banks Industry Group according to GICS.
For further information on indices, please see the Important information section.

We believe we are at an attractive time in the alpha cycle for the Fund – suggesting relative outperformance may continue.

Global Franchise alpha cycle
Cumulative (I-Acc) outperformance since inception*

Why the market is turning to quality - Graph 4

Annual performance in USD (%)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Global Franchise I Acc* -32.41 36.8 6.8 8.4 15.8 16.4 4.4 9.2 0.9 24.9 -3.6 28.2 16.3
MSCI AC World NR** -40.7 30.0 11.8 -5.9 16.1 22.8 4.2 -2.4 7.9 24.0 -9.4 26.6 16.3

Past performance is not a reliable indicator of future results, losses may be made.
Source: Morningstar, 31 July 2021. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD.
*Inception date 10 April 2007. The performance is based on the OEIC Ninety One Global Select Equity Fund from 10 April 2007 which then merged into the Luxembourg-domiciled Ninety One GSF Global Franchise Fund on 04 July 2009.
** Benchmark: At Inception = MSCI World NR; Current Since 1 Oct 2011 = MSCI AC World NR.
The Fund is actively managed. Any index is shown for illustrative purposes only.

General risks:

The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.

Specific risks:

Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Important Information

This is a marketing communication for institutional investors and financial advisors only. It is not to be distributed to retail customers who are resident in countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is unlawful. Please visit www.ninetyone.com/registrations to check registration by country. If you are a retail investor and receive it as part of a general circulation, please contact us at www.ninetyone.com/contactus.

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

The Fund is a sub-fund of the Ninety One Global Strategy Fund, which is a UCITS authorised by the CSSF and organised as a Société d’Investissement à Capital Variable under the law of Luxembourg. Ninety One Luxembourg S.A. (registered in Luxembourg No. B 162485 and regulated by the Commission de Surveillance du Secteur Financier) is the Manager of the Fund. This communication is not an invitation to make an investment nor does it constitute an offer for sale. Any decision to invest in the shares of the Fund should be made only after reviewing the full offering documentation, including the Key Investor Information Documents (KIID) and Prospectus, which set out the fund specific risks.

Fund prices and English language copies of the Prospectus, annual and semi-annual Report & Accounts, Articles of Incorporation and local language copies of the KIID may be obtained from www.ninetyone.com. A summary of investor rights can be found in the Prospectus, and details of Ninety One’s complaints handling procedures are available in English on www.ninetyone.com/complaints. Ninety One Luxembourg reserves the right to discontinue the marketing of its Funds in countries where they are registered.

In Switzerland, this information is available free of charge from the Swiss Representative and Paying Agent, RBC Investor Services Bank S.A., Esch-sur-Alzette, Bliecherweg 7, CH-8027 Zurich, Switzerland. In Spain, the Ninety One Global Strategy Fund is registered with the Comisión Nacional de Mercados y Valores as a foreign collective investment scheme marketed in Spain, with the number 734.

In the US, this communication should only be read by Institutional Investors (Accredited Investors and Qualified Purchasers), Financial Advisors (FINRA-registered Broker Dealers) and, at their exclusive discretion, their eligible clients. It must not be distributed to US Persons apart from the aforementioned recipients. THIS INVESTMENT IS NOT FOR SALE TO US PERSONS EXCEPT ACCREDITED INVESTORS AND QUALIFIED PURCHASERS.

In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act 2001).

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One. All rights reserved. Issued by Ninety One, September 2021.

Indices

Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2021. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf